The UK showing signs of recovery– but for how long?

The UK has just had its second consecutive quarter of growth, but are there questions to be raised over the longer term sustainability of this growth, which is fuelled by economy wide competitiveness? In the recently published Global Competitiveness Report from the World Economics Forum, the UK has fallen down the list of rankings of the 148 participating economies from 8th to 10th, below the Netherlands and Japan and above Norway. This is despite the strong showings in several sectors including market size (6th), efficiency of the labour market (5th), and the sophistication (9th) and innovation (12th) of businesses, all of which will have been expected. The report’s stand-out statement about the UK is that it ‘deteriorates slightly in several areas’. Good news then. Out of these ‘several areas’ there are two main sectors that have proved especially troublesome for the UK: the macroeconomic environment and the state of the financial markets.

Obviously the UK has one of the most developed financial markets in the world, but surprisingly it registers at only 15th in the rankings. This is predominately due to two sub-sections of the category, the soundness of banks, relating to the stability of balance sheets, and the ease of access to loans.

The soundness of the UK’s banks reads at 105th in the world. This was anticipated, as the rebalancing of banks’ interests is an on going process and they are trying to offload volatile assets to improve their robustness.

The second side of that coin is the ease of access to loans. The UK rates at 82nd in the world on that scale. And it’s plain to see why. In a study conducted by the report, 21% of businesses said access to finance ranked as the biggest problem area in the running of their firms.

If our sources of credit are to be relied upon, what we need in the UK is not a draconian slow down in the amount of money that is lent to secure the future of our banks, nor a financial market that hands out loans right, left and centre. The UK’s banks need to find a happy medium between these two, combined with transparency, appropriate regulation and thorough assessment of risk when lending.

Perhaps more worrying is the state of the UK’s government budget balance, at -8.3% of GDP (140th), the level of government debt at 90.3% (136th) and the gross national savings at only 10.8% (123rd). Furthermore, the UK’s infrastructure ranks 28th in the world, behind Qatar, Taiwan and Barbados.

What can we take from this? Perhaps that despite the government’s best intensions and rhetoric, we are recovering much more slowly than the majority of other world economies owing, as the report puts it, to ‘short term fire-fighting’. So, despite the promising quarter-on-quarter GDP growth rates and the recent upward revision of the forecast by the OECD to 1.5%, we should worry about the sustainability of this recovery in the long-term. A stable and secure macroeconomic environment plus good infrastructure is a necessity for an economy to thrive in a sustainable way, and only when this is the case will investment and confidence in the economy truly begin to increase.